Momentum Strategy: Buy Strength, Sell Weakness

Overview

Momentum strategies exploit the empirical fact that assets that have outperformed over the past 3–12 months tend to keep outperforming. You rank a universe of instruments, buy the strongest, sell the weakest, and rebalance periodically. The edge is persistent across asset classes and decades of data.

Setup

Universe: 20–50 liquid stocks, sector ETFs, or currency pairs
Ranking window: 6-month (126-day) rate of change
Holding period: monthly rebalance
Filter: exclude earnings week and illiquid names

Entry rules

Calculate 6-month return for every instrument in the universe
Rank from strongest to weakest
Buy the top decile (top 10%)
Short the bottom decile (optional; long-only is simpler for beginners)
Equal-weight each position at the monthly rebalance

Stop loss rules

No price-based stop — momentum relies on time-based exits
Hard exit if an instrument drops out of the top 30% at rebalance
Volatility-based position sizing controls risk instead of stops

Take profit rules

Exit when an instrument falls below the median rank at the next rebalance
Or when 6-month momentum turns negative
Let winners compound across rebalances

Risk management

Parameter	Value
Risk per position	1–2% volatility-weighted
Max portfolio drawdown	20% before pause
Rebalance frequency	Monthly
Hedge	Long/short balanced, or cash overlay

Use the position size calculator to volatility-weight each position so a 2% ATR stock and a 5% ATR stock carry equal risk.

When it fails

Momentum crashes occur at regime transitions (e.g., 2009, March 2020)
Whipsaw during choppy leadership rotation
Mitigate with a 10-month (200-day) trend filter on the broad index — go to cash when the index is below its 200 SMA

Key principle

Buy what's already going up. Don't anticipate — participate. The bulk of returns comes from a handful of winners; cut laggards at rebalance.